On 11 January 2024 the FCA announced that it will be undertaking work in relation to the historical use of DCAs in the motor finance market. In 2021, the FCA banned DCAs in this market, which removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance. The FCA's current action follows an increase in the number of complaints from customers to motor finance firms claiming compensation because of historical use of DCAs. There is significant dispute between some firms and consumers on whether firms have breached the regulatory requirements and actions have been brought by consumers to the Financial Ombudsman Service (FOS) and County Courts as complaints are being rejected by firms. The FCA anticipates that given the number of motor finance agreements involving DCAs and the recent FOS decisions, there could be many more complaints raised with firms which could also potentially be referred to the FOS, and it is therefore concerned that this may lead to disorderly, inconsistent and inefficient outcomes for consumers. The FCA is therefore taking two actions to address these concerns which are discussed below.

So what?

i)    Section 166 Review leading to possible requirement for consumer redress under FSMA

The FCA's intervention has created significant challenges for motor finance firms, especially lenders in this market. The FCA is using its powers under s166 of the Financial Services and Markets Act 2000 (FSMA), to review historical motor finance commission arrangements and sales across several lenders. As a result of this review, if the FCA finds there has been widespread misconduct and that consumers have lost out, the relevant firms may be required to pay consumer redress under an industry-wide consumer redress scheme later this year.

i)     Changes to DISP rules creating new requirements for motor firms to handle DCA complaints 

The FCA has also introduced (without consultation) changes to its Dispute Resolution: Complaints (DISP) rules which came into force on 11 January 2024. Under the new rules, the FCA has implemented a 37-week suspension on the 8-week time limit for motor finance firms to provide a final response to complaints concerning motor finance agreements involving a Dealer Commission Arrangement (DCA) between the lender and the broker. Additionally, the time limit for complainants to refer DCA-related complaints to the Financial Ombudsman Service (FOS) has been extended from 6 months to 15 months. According to the FCA this will mitigate the risk of increased complaints leading to disorderly, inconsistent and inefficient outcomes for consumers and limit the number of complaints that would otherwise end up with FOS.

The new DISP rules apply to both lenders and brokers in the motor finance market and impose some strict deadlines and complex requirements in relation to these firms' complaints handling procedures. The changes mean that firms should be reviewing their existing complaints handling procedures in relation to the DCA complaints. They need to revisit their internal and external communication processes and ensure that these changes are brought to their customers' attention and that the existing complainants are notified about the changes to time limits for complaint handling and FOS referrals. Lastly, the new rules are also imposing some detailed requirements surrounding record keeping of historical DCA complaints that firms should take careful note of.

Current Status

The FCA is continuing its review and has recently published an update expressing concerns that many firms are struggling to promptly provide the data the FCA needs for the review. More importantly, it has found firms taking different approaches to account for the potential impact of previous use of DCA on their financial resources. Relevant firms should carefully consider the steps the FCA is asking them to take in ensuring their financial resources are adequate to cope with the additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints. These firms are being asked to take immediate steps to undertake an assessment of whether the firm’s financial resources are adequate and notify the FCA immediately if they are unlikely to have adequate financial resources in the foreseeable future. The FCA confirms that it will set out its next steps relating to the review by 24 September 2024 at the latest.